Asian central banks are getting their mojo back in calling for ‘time out’ on the party of easy liquidity
The Philippines just had its William McChesney Martin moment, and not a millisecond too soon.
The reference here is to the long-serving, larger-than-life economist who helmed the US Federal Reserve from 1951 to 1970.
It was Martin who famously said that a central banker’s job is to “take away the punchbowl just as the party gets going.” Filipinos witnessed their central bank Governor Nestor Espenilla Jnr doing just that on Thursday, a move aimed at restoring economic sobriety.
It also was a piece of one of the most important narratives in Asian economics: monetary authorities beginning to lead markets, not following and enabling their whims.
Espenilla, frankly, has been a bit slow to cut off forces bidding up prices. Inflation surging at a 5 per cent rate and a currency under downward pressure forced his hand.
The 50 basis-point hike in the benchmark rate to 4 per cent enacted by the Bangko Sentral ng Pilipinas was its biggest in a decade.
Not only might it restore some credibility to Manila’s policy mix, but also buttress confidence in Asia at a moment of extreme uncertainty. Donald Trump’s escalating trade war is throwing off balance governments throughout the region. The fallout in markets, meantime, has authorities throwing down the gauntlet on short-sellers.
Bank Indonesia, for example, has tightened at each of its last three policy meetings, and once out of cycle in May. In fact, since Perry Warjiyo took the helm in May, all he’s done is angle for ways to hike rates to shore up the rupiah and curb excesses.
Reserve Bank of India’s Governor Urjit Patel has been plenty busy, too. On August 1, he hiked the repo rate for the second time in two months - by 25 basis points to 6.5 per cent.
Singapore and Malaysia have shifted into austerity mode. The case for higher rates is building in Thailand. Even Japan, which has been stuck at, or near, zero for 18 years, is anxious to withdraw from markets addicted to its always-brimming punchbowl.
South Korea was the vanguard of this cycle, of course. Last November, Bank of Korea pulled off the first tightening by a major Asian central bank since 2011. Governor Lee Ju-yeol is itching to pull off another tightening step, despite headwinds racing Korea’s way from Trump’s White House.
The urgency level differs markedly from the Philippines, Indonesia and India, which suffer from current-account deficits that can make currencies a sell. But count both Tokyo and Seoul among places that want to try temperance for a change.
That’s a wake-up call for governments. Since the 2008 “Lehman shock,” most national leaders left crisis-response measures to central bankers. Before long, the arrangement gave leaders the impression they could throttle back on reforms to reduce red tape, strengthen financial systems and spread the benefits of growth more widely.
Ultra loose monetary policies were about life-support, not steering business cycles for the long haul. And so, central bankers getting their mojo back is a healthy signal for the region. On one hand, it squeezes the froth out of markets and consumer sectors, ensuring growth is more organic and sustainable. On the other, it prods fiscal policy officials to raise their economic games.
There are limits. Emerging-market debt in general has quadrupled since 2008, putting credit ratings at risk. Economists from Harvard’s Carmen Reinhart to Nobel laureate Paul Krugman worry markets face even greater chaos than during the 2013 Fed “taper tantrum” if central banks go too far.
The tapering in Asia these days is, thankfully, of the William McChesney Martin variety. Asia’s central bankers are declaring “last call” at just the right moment.
William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s